There are two non-exclusive ways they could pay their musicians more. Either they could maintain their profit and start charging their listeners more, or maintain their pricing and cut their profit. Imagine they make it their mission to make sure artists get paid the most that consumers are willing to pay for their music. So they do both. They start charging more and more, and channel all earnings (minus operating cost) to their artists and take no profit.

The first thing to acknowledge is that people will be willing to pay more for music (and art and literature and knowledge) if they are forced to. This may be hard to imagine in today’s world of overwhelmingly cheap and accessible content that is constantly vying for our attention. But take our hypothetical scenario as an example. In support of their mission of fair compensation for musicians, imagine that Spotify takes over the entire music industry, so that all music that is created can only flow from creator to consumer through them, and they can completely control the terms of this. Once they monopolize the industry, they start raising their prices. This makes music a more expensive commodity, and it starts to disappear from the sphere of our attention where it was plentiful before. It takes a while for people to adapt to this removal of stimulus, but gradually a population that was overstimulated and spoilt for choice becomes hungrier for music, and willing to pay more.
Spotify can milk this to the fullest extent possible by making listeners pay as much as they are willing to. In the extreme case they are able to artificially create the condition of optimal scarcity (like the diamond industry), make the maximum revenue possible, and pay the creators the maximum possible (unlike the diamond industry). Under such an extreme condition, a considerable section of the population will be unable to afford the amount of music they would like, while a small rich fraction will be paying most of the money that musicians make.

Now it becomes important to consider the particular nature of music and other cultural content: it gives us intrinsic joy to create and share such content. Even if it isn’t making them any money, people feel like creating and sharing art, and seeking out and sharing academic knowledge. Under conditions of extreme scarcity that we’re imagining, there will be people who will feel more compelled to create and share music for cheaper or for free, because the need for this is more acute and the joy in satisfying it is greater. We will have people who deliberately forsake the possibility of making a lot of money, and find ways to create and share their own or others’ content for free, sometimes in violation of existing laws.

This is a crucial step in the reasoning. The property of intrinsic joy is not true of a lot of other services and content that people create. There is little intrinsic joy in working through accounting spreadsheets: its value is mostly tied to the money it earns that can be spent towards other things that bring happiness. But art, culture, learning and science bring intrinsic joy in doing and sharing.

As a black market of cheap or free content starts becoming available, the starved people will naturally turn to it. This will directly eat away at Spotify’s business and begin to harm their altruistic mission of paying creators the most possible. They will realize that the only way to continue business is to lower charges and pay their creators less.
The bright side of this is that content that brings us intrinsic joy can never be completely taken away from us and monopolized by corporations. Since there is incentive to not only consume for cheap, but produce and share for cheap, people will always find a way for cheap distribution.

In short, artists and academics make less money than their content is worth because they are compensated by the intrinsic joy of the work and are willing to be paid less, and the free market automatically adjusts to price their work accordingly.

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